U.S.- China trade war has profoundly impacted the automobile industry as companies are trying to tackle massive input costs. Additionally, the increased interest rates in the U.S. have only added to the financial pressure, and in 2018, the sales of small & compact cars in the country has seen a sharp decline. Although the indicators are in support of GM’s decision to close plants, it is yet to be seen whether it would ease the financial burden or increase the company’s troubles.

In the year 2018, almost two-thirds of all the cars sold in the U.S. were SUVs and trucks. So, in tune with the current customer spending patterns, GM has decided to realign its sales strategy to avoid further losses, and hence, has decided to stop small & compact car production in the U.S. Through this move the company aims to achieve $6 billion in cash savings by 2020. Closing the plants would result in nearly $4.5 billion reductions in costs and $1.5 billion reductions in capital expenditures.

Impact of plant shutdown on the job market

Prima facia, closing production does seem like a financially viable option for the company but simultaneously it is bound to have a catastrophic impact on the American job market. Closing the plants is expected to result in nearly 14,000 job cuts, most of which will be in the North American region. As an immediate blow to the job markets, almost 3,300 jobs in the U.S. and 2,500 jobs in Canada are expected to be cut. The company further plans to cut additional 8,000 salaried jobs. GM’s current workforce is estimated to be around 180,000 and the proposed job cuts would mean a reduction of around 15% from the North American workforce.

Shortlisted plants for closure

Out of the discussed five plants, three are producing small, compact cars while the remaining two are into transmission manufacturing. The Company has announced its plans to shut down the Lordstown plant which is manufacturing Chevrolet Cruze Compact along with the Detroit-Hamtramck plant which is producing Chevrolet Volt, Buick LaCrosse, and Cadillac CT6. Oshawa, which primarily makes the Chevrolet Impala, will also be closed. In addition to these production facilities, the transmission plants at Baltimore and Warren will also be shut down.

General Motor’s Global sales strategy

Although the year 2018 saw improved growth in the sales of small and compact cars across the Globe, the U.S. market observed an opposite trend, thus pushing manufacturers to sell only bigger cars here. In comparison to this, Asian Markets like India and China hold a lot of value and opportunities for small car manufacturers on account of lower productions costs & higher demand for smaller vehicles. Hence the company has decided to re-organize its strategy by cutting down the sales of small cars in the U.S while continuing to supply the same to the Asian countries.

This announcement of such a massive shut down and heavy job reduction by GM has come as a blow to President Trump’s promise of improving employment in the country. Reacting to the development, President Donald Trump said that his administration and lawmakers were exerting “a lot of pressure” on GM. He said that it has been communicated to the company that the U.S. Government has done a lot for GM and if its cars aren’t selling, the company needs to produce the ones that will. President Trump further expressed his disappointment and said, “I am not happy about it.”

Realizing the impact of such massive job cuts, U.S. President even resorted to threatening the company of consequences. In his tweet, President Trump said, “Nothing being closed in Mexico & China.”Trump further added in his tweets, “The U.S. saved General Motors, and this is the THANKS we get! We are now looking at cutting all @GM subsidies, including for electric cars.” It was expected to see such a reaction from the U.S. President since a lot is at stake. Shutting of plants and job cuts would not only damage the political image of the current government but could also result in heavy financial losses to the Country.

Future impact on Federal Investments

Earlier in 2008- 2009, when GM was standing at the brink of bankruptcy following the Great Recession, it was the American government which came to the Company’s rescue. The Federal Government invested $51 billion to ensure GM and Chrysler could emerge from the financial recession. Over the years, the Federal Treasury was able to recover most of this investment, though about $11 billion of taxpayer’s money was never repaid. All in all, the Federal government lost a huge amount of investment in bailing out the auto giant.

Despite all the tough words from Administration and the U.S. President himself, GM seems to be determined to carry out its structural shift. Whether or not this decision will help the company to achieve financial stability is a question that only the future can answer. But going against the current Government may surely have its own set of dire consequences.

The way ahead for General Motors

As GM is one of the largest Federal Contractors, a major chunk of its corpus comes from the Government projects. The federal government has already invested hundreds of millions of dollars’ worth in contracts and other arrangements with the company and closing plants might make it difficult for GM to secure new projects in the future.

Speaking about the magnitude of these government contracts, GM received contracts worth $266 million from the Federal Government in the Fiscal year 2015. In recent years, the company has bagged $360 million worth Federal grants, including those for research done for the Defence Department and to improve battery technology and other advances. So, while the company was making huge advances in electric vehicle technology, a huge part of this was funded by the government.

Apart from funding for Research and Development of new technologies, GM also manufactures an entire fleet of cars for the government and its various departments. GM’s Chevy Suburbans are a staple for the Secret Services and other Federal officials. A custom-made Cadillac called “The Beast” is used for President’s personal transportation. The company has also worked with the United States Army to produce the hydrogen-powered Chevrolet ZH2 off-road truck.

It is not just about losing Federal grants & contracts but also about losing out on critical subsidies which can overnight make their electric vehicles expensive to buy. With non-renewable fuel becoming less and less available, the automobile industry has been for years working on alternative fuels. Out of all the alternative platforms, electric vehicles seem to be the most promising.

The American Government has come up with a strategy to incentivize the sales of electric vehicles so that more and more customers shift to cleaner technology. Currently, the Internal Revenue Service, a Government Department, provides an up-front subsidy of up to $7,500 for a new electric vehicle. This subsidy is given until the auto manufacturer sells 200,000 qualified vehicles. Once the threshold is achieved, the subsidy is gradually phased out.

Since electric technology is still quite expensive, the subsidy helps reduce the effective price of the vehicle thus making it more affordable for the customer to buy. If this subsidy is removed completely from GM vehicles, it would result in their electric cars becoming very expensive. In wake of the current level of competition in the automobile industry, the rise in vehicle prices could result in a loss of potential customers for the company as they would prefer to buy cars which are cheaper.

As it is, the automobile industry has always been price dependent and with multiple competitors selling the same product at cheaper costs, GM could lose the race of the future. Eventually, the company would be forced to devise a new strategy to make their vehicles cost-effective and could end up losing all the money they would save from the proposed plant shut down.

To sum up the current GM fiasco, the decision to close plants might look like a financially profitable option as of now, but from a long-term perspective, this decision is bound to trigger a series of chain reactions which would not only affect the company’s overall position in the industry but would also create multiple non-financial issues.